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The Army's Future Combat Systems (FCS) program features multiple new systems linked by a first-of-a-kind information network. The Army contracted with a lead systems integrator (LSI) for FCS that could serve in a more expansive role than a typical prime contractor would. In response to a congressional mandate, this report addresses (1) why the Army decided to employ an LSI for the FCS program; (2) the nature of the LSI's working relationship with the Army; and (3) how FCS contract fees, provisions, and incentives work. In conducting its work, GAO reviewed extensive program documentation and held discussions with key officials at DOD and throughout the FCS program.

In 2003, the Army contracted with an LSI for FCS because of the program's ambitious goals and the Army's belief that it did not have the capacity to manage the program. The original timeframe for FCS's development was a shorter time frame than for an individual weapon system program, let alone a complex systems-of-systems program with a high number of immature technologies at program start. The Army realized that its compartmentalized workforce did not lend itself to the kind of crosscutting work that the FCS program would demand. The Army workforce also did not have the expertise needed to develop the FCS information network or enough people to support the program had it been organized into separate program offices. In contracting with the Boeing Company as LSI, the Army believed it found a management partner who could define and develop FCS and reach across the Army's organizations. Boeing subcontracted with another company, Science Applications International Corporation, to assist with its responsibilities as LSI. The working relationship between the LSI and the Army is complex. The LSI is a traditional contractor in terms of developing a product for its customer, the Army, but also serves like a partner to the Army in management of the FCS program. In its management role, the LSI makes decisions collaboratively with the Army. An advantage of this arrangement is that the LSI and Army can maintain flexibility when dealing with shifting priorities. However, that relationship may pose significant risks to the Army's ability to provide oversight over the long term. The Office of the Secretary of Defense is in a position to provide this oversight but thus far has allowed the Army to depart significantly from best practices and the Office's own policy for weapon system acquisitions. For example, the Office of the Secretary of Defense has also allowed the Army to use its own cost estimates rather than independent--and significantly higher--cost estimates when submitting budget requests. The Army's experience with the LSI on the FCS program may provide the Office of the Secretary of Defense insights on broader acquisition management issues. The Army has structured the FCS contract consistent with its desire to incentivize development efforts. The definitized cost-reimbursable research and development contract valued at $17.5 billion contains up to a 15 percent total fixed/incentive fee, or about $2.3 billion. As with many research and development contracts, the FCS contract obligates the contractor to put forth its best efforts, but does not assure successful outcomes. Assuming that critical design review is completed in 2011, the Army will have paid the LSI over 80 percent to cover the contract costs, plus a possible 80 percent of its fee or profit. GAO has previously reported that most cost growth in DOD weapon system programs occurs after critical design review. Therefore, it is possible for the LSI to have garnered most of its payouts in costs and fees early next decade, even if despite its best efforts, the FCS capability ends up falling far short of the Army's goals. The Army notes that its fee structure is intended to encourage good performance early in the program.

Recommendations for Executive Action

Status: Closed - Not Implemented

Comments: DOD concurred with this recommendation and stated that they review program changes at least yearly in support of Selected Acquisition Report submissions, and that they would continue to scrutinize FCS program changes and accurately report against the program baseline. They point out that changes to scope have been as a result of affordability constraints and additional desired capability. In our view, however, some of these changes were made to correct shortcomings in the original acquisition strategy.

Recommendation: The Secretary of Defense should review the major FCS program changes to ensure that determinations for the government to accept changes as being programmatic or scope-related in nature are carefully scrutinized.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: In April 2009, the SECDEF made a decision to cancel the vehicle component of the FCS program. (The entire acquisition program was subsequently cancelled.) The SECDEF concluded that there were significant unanswered questions concerning the FCS vehicle design strategy and expressed concern that the vehicles did not reflect the lessons of counterinsurgency and close-quarters combat in Iraq and Afghanistan. He added that because the FCS vehicles were estimated to cost over $87 billion, he needed more confidence in the program strategy, requirements and maturity of the the technologies before proceeding further. In making this "no-go" decision, the SECDEF found that the FCS would not be able to provide the capabilities the Army will need and he did not have confidence in its acquisition strategy, requirements, and technology maturity. Moreover, he stated that he was troubled by the terms of the FCS contract, particularly its very unattractive fee structure that gives the government little leverage to promote cost efficiency.

Recommendation: The Secretary of Defense should ensure that there is the best link possible between the fee events in the FCS contract and actual FCS demonstrations.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: In April 2009, the SECDEF made a decision to cancel the vehicle component of the FCS program. (The entire acquisition program was subsequently cancelled.) The SECDEF concluded that there were significant unanswered questions concerning the FCS vehicle design strategy and expressed concern that the vehicles did not reflect the lessons of counterinsurgency and close-quarters combat in Iraq and Afghanistan. He added that because the FCS vehicles were estimated to cost over $87 billion, he needed more confidence in the program strategy, requirements and maturity of the the technologies before proceeding further. In making this "no-go" decision, the SECDEF found that the FCS would not be able to provide the capabilities the Army will need and he did not have confidence in its acquisition strategy, requirements, and technology maturity. Moreover, he stated that he was troubled by the terms of the FCS contract, particularly its very unattractive fee structure that gives the government little leverage to promote cost efficiency.

Recommendation: The Secretary of Defense should reassess OSD's approach to overseeing the FCS program, including asserting its own policy-based markers for progress, particularly in the areas of cost, technology maturity, design maturity, and production maturity.

Agency Affected: Department of Defense

Status: Closed - Not Implemented

Comments: DOD concurred with this recommendation and stated that there are a number of ongoing activities to support this recommendation. For instance, DOD is updating its acquisition policy, a key component of which will be the Department's revitalization of the system engineering process to better manage and control system and system-of-system acquisitions. However, DOD has not taken sufficient action to limit the role of the prime contractor in program management activities or increase the capacity of service officials to effectively manage defense acquisitions without support from the prime contractor.

Recommendation: The Secretary of Defense should assess whether the experience of the LSI on FCS has broader implications for acquisition management, such as the ability of the DOD workforce to manage a system-of-systems acquisition.